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Accounting for Different Uncertainties: Implications for Climate Investments?

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  • Svenja Hector

    (ETH Zurich Department of Management, Technology and Economics)

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    Abstract

    The paper clarifies the link between changes in risk aversion and the effect on the consumption discount rate. In a general framework that can cope with various forms of uncertainty, it is shown that the response of the consumption discount rate to a change in risk aversion depends on some fundamental properties of the considered uncertainties. The application of this general result to specific forms of uncertainty extends existing results to more general forms of risk and yields a new result on preference uncertainty.

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    File URL: http://www.feem.it/userfiles/attach/2014181126454NDL2013-107.pdf
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    Bibliographic Info

    Paper provided by Fondazione Eni Enrico Mattei in its series Working Papers with number 2013.107.

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    Date of creation: Dec 2013
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    Handle: RePEc:fem:femwpa:2013.107

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    Related research

    Keywords: Discount Rate; Risk Aversion; Kreps-Porteus-Selden; Risk-Sensitive Preferences; Uncertain Preferences; Climate Change;

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    References

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    1. Minh Ha-Duong & Nicolas Treich, 2004. "Risk Aversion, Intergenerational Equity and Climate Change," Environmental & Resource Economics, European Association of Environmental and Resource Economists, European Association of Environmental and Resource Economists, vol. 28(2), pages 195-207, June.
    2. Dreze, Jacques H. & Modigliani, Franco, 1972. "Consumption decisions under uncertainty," Journal of Economic Theory, Elsevier, Elsevier, vol. 5(3), pages 308-335, December.
    3. BLEICHRODT, Han & EECKHOUDT, Louis, . "Saving under rank-dependent utility," CORE Discussion Papers RP -1752, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    4. Traeger, Christian P, 2008. "Why uncertainty matters - discounting under intertemporal risk aversion and ambiguity," CUDARE Working Paper Series, University of California at Berkeley, Department of Agricultural and Resource Economics and Policy 1092R2, University of California at Berkeley, Department of Agricultural and Resource Economics and Policy, revised Jan 2012.
    5. Christian P. Traeger, 2009. "Recent Developments in the Intertemporal Modeling of Uncertainty," Annual Review of Resource Economics, Annual Reviews, Annual Reviews, vol. 1(1), pages 261-285, 09.
    6. Bommier, Antoine & Chassagnon, Arnold & Le Grand, François, 2010. "Comparative Risk Aversion: A Formal Approach with Applications to Savings Behaviors," TSE Working Papers, Toulouse School of Economics (TSE) 10-141, Toulouse School of Economics (TSE).
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    12. Crost, Benjamin & Traeger, Christian P., 2010. "Risk and aversion in the integrated assessment of climate change," CUDARE Working Paper Series, University of California at Berkeley, Department of Agricultural and Resource Economics and Policy 1104R, University of California at Berkeley, Department of Agricultural and Resource Economics and Policy, revised Jul 2011.
    13. Chichilnisky, Graciela & Beltratti, Andrea & Heal, Geoffrey, 1998. "Uncertain future preferences and conservation," MPRA Paper 7912, University Library of Munich, Germany.
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    15. Chew, Soo Hong & Epstein, Larry G., 1990. "Nonexpected utility preferences in a temporal framework with an application to consumption-savings behaviour," Journal of Economic Theory, Elsevier, Elsevier, vol. 50(1), pages 54-81, February.
    16. Yongyang Cai & Kenneth L. Judd & Thomas S. Lontzek, 2013. "The Social Cost of Stochastic and Irreversible Climate Change," NBER Working Papers 18704, National Bureau of Economic Research, Inc.
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    23. repec:hal:journl:hal-00267891 is not listed on IDEAS
    24. Keith C. Knapp & Lars J. Olson, 1996. "Dynamic Resource Management: Intertemporal Substitution and Risk Aversion," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, Agricultural and Applied Economics Association, vol. 78(4), pages 1004-1014.
    25. Frank Ackerman & Elizabeth Stanton & Ramón Bueno, 2013. "Epstein–Zin Utility in DICE: Is Risk Aversion Irrelevant to Climate Policy?," Environmental & Resource Economics, European Association of Environmental and Resource Economists, European Association of Environmental and Resource Economists, vol. 56(1), pages 73-84, September.
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    Cited by:
    1. Edilio Valentini & Paolo Vitale, 2014. "Optimal Climate Policy for a Pessimistic Social Planner," Working Papers, Fondazione Eni Enrico Mattei 2014.33, Fondazione Eni Enrico Mattei.

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